I’m on holiday this week and next but feel compelled to post a brief comment on NicholsOnGold.com following the Fed’s September 18th decision to maintain is stimulative monetary policy. Contrary to strongly held market expectations, the Fed has postponed the commencement of tapering - a policy of gradually dialing back or reducing its $85 billion monthly bond purchases.
Though a bombshell to gold and other financial markets, the postponement of tapering was no surprise to our readers and clients. We have long argued that a weaker economy, highly vulnerable to any rise in interest rates, would preclude the early adoption of less stimulative monetary policies.
Although this week’s news triggered a swift four percent jump in the price of gold, I don’t expect the metal to necessarily move higher in the short term. Gold prices will continue to reflect monetary policy expectations and the trading activities of large-scale institutional speculators.
Traders and investors will soon anticipate the reduction in monetary accommodation to begin following either the October 29-30th Federal Open Market Committee meeting or the December 17-18th policy-setting meeting - depending on the state of the economy, especially labor market conditions that have been and remains an important concern of Fed policymakers.
With economic prospects so uncertain and with coming changes in FOMC voting membership, my own feeling is that the Fed will more likely wait until sometime next year before it begins tapering back on the monthly rate of monetary stimulus.
For one thing, the economy is not recovering at a satisfactory pace . . . and economic activity will likely be retarded by the impending Federal government-spending shutdown. For another, the Fed will likely have new leadership following the expiration Chairman Bernanke’s term as Chairman and significant changes in the FOMC’s voting membership - and it is difficult to imagine how this may effect future monetary policy.
Moreover, in the days ahead, we will likely see a partial shutdown in Federal spending as the Congressional Republicans and Democrats remain at odds, refusing compromise necessary to pass a new Federal budget. This will have a direct effect on economic activity, consumer spending, and sentiment, enough so that the U.S. economy could fall of the ledge back into recession - compelling the Fed to adopt more-stimulative pro-gold monetary policies.
At the same time, the impending U.S. Federal debt ceiling and the real possibility the U.S. Treasury may default on its debt in world financial markets could trigger a downgrading of Treasury debt by the rating agencies and possibly even a run on the dollar with gold being the primary beneficiary.
